Tuesday, June 30, 2009

Slump Dashes Oregon Dreams of Californians - (www.nytimes.com) Susan and Mike Telford had a plan back in the boom years in California. They would sell their house outside Fresno at a solid profit and take their equity to this sunny mountain city to build a better life, a fresh-air future in Oregon. “We wanted to lose the commute, to lose the smog,” Mrs. Telford said. “We wanted to lose California.” They moved here in 2006, when Bend was one of the fastest-growing places in the West and money and migration from California fueled that growth. Now the Bend area’s unemployment rate, at almost 16 percent, is one of the highest of any metropolitan area in the nation. “For sale” signs dot desert-toned, unfinished subdivisions. Luxury furniture stores downtown are going out of business. San Francisco chefs have fled. The freefall has made Bend a succinct symbol for the economic perils of “lifestyle destinations” in the so-called New West, recreation-heavy communities where jobs have been heavily tilted toward construction and services and where many of the new residents were self-made exiles from California cashing in on their overpriced real estate. Bend, a former timber town that now has 80,000 residents, was particularly popular among those drawn to the often rainy Northwest because it is located on the sunny side of the Cascade Range. Now the Californians who contributed to Oregon’s growth are in some cases adding to its economic struggle. As of May, Oregon had the second-highest unemployment rate in the nation, at 12.4 percent, behind Michigan. California, which has not released its May figures, ranked fifth in April. While some other states with high unemployment, including Michigan, have seen their labor forces shrink, Oregon’s labor force has grown. Economists say some of the growth appears to be driven by people who moved here with money they made in California, whether from real estate or stock market investments, and expected to get by but now must look for work. “It’s just so depressing to hear them because they thought they had life handled and they don’t,” said Bobbie Faust, an employment counselor who works for the state in Bend. The Telfords are among those facing trouble. They had presumed they would be able to sell their house in Fresno for more than $300,000 to help pay the mortgage on the new house they bought near the Deschutes River in Bend for $475,000. But the Fresno house has yet to sell, and Mrs. Telford, an accountant, has lost a series of jobs at small firms here that she said had downsized. The couple’s only income now comes from her unemployment checks and her husband’s salary as a high school teacher. “The cash flow is negative,” Mrs. Telford said. “This will be the first time we’ve had to go into savings.”

Housing inventory increase expected - (www.lvrj.com) Lifted ban means wave of Las Vegas foreclosures is likely. A wave of foreclosures is expected to hit Las Vegas as banks lift a voluntary moratorium that was extended from March to the end of May, though nobody has an accurate estimate of how many bank-owned homes will be added to an already bulging inventory. The total number of homes for sale in Las Vegas declined to 16,202 in April, compared with 21,338 in the same month a year ago, Las Vegas-based SalesTraq reported. Real estate-owned, or bank-owned inventory stood at 14,722, up from 11,628 a year ago, but down from the previous two months. Housing analyst Larry Murphy of SalesTraq said he's heard there could be an inventory of unreleased bank-owned homes ranging from 20,000 to 30,000. It's an impossible number for anyone to "get their arms around," he said. "This thing is like a cloud of mystery out there. We can all hypothesize," Murphy said. Bank-owned inventory came down in March and April, and Murphy said he's waiting to see May's data to draw any conclusions. The country is still in the "middle innings" of the bursting of the great housing bubble, said Whitney Tilson, principal of New York investment firm T2 Partners. He recently published a 75-page report that said there's more pain to come. It takes an average of 15 months from the first missed mortgage payment to a trustee sale of the home, usually by auction, he said. The subprime loans that defaulted in early 2007 led to the wave of foreclosures in 2008. "We predicted in early 2008 that it would get so bad that it would require large-scale government intervention, which has occurred, and we're not finished yet," Tilson said. Given that other types of loans with longer reset dates are now starting to default at catastrophic rates, the "sober implications" are for foreclosures and auctions to extend into 2009 and beyond, driving home prices down further, he said. More than $200 billion in option ARMs are still outstanding, including $29 billion that will reset by the end of this year and another $67 billion that will reset in 2010, according to Washington, D.C.-based Zuckerman Spaeder. The average borrower's mortgage payment of $1,672 will increase by $1,053. Alexis McGee of Sacramento, Calif.-based Foreclosures.com said there's a "phantom" inventory of repossessed properties not showing up for sale on the Multiple Listing Service. Only about 30 percent of them are listed on the market, McGee said. Foreclosures.com counted 18,505 real estate-owned homes in Clark County through April, compared with 7,251 a year ago. Preforeclosures rose to 33,917 in the first four months, up from 20,363 a year ago. The foreclosure inventory in Las Vegas has dried up for now, Earl Crouse of Better Homes Realty said. He expects it to stay that way until the fourth quarter. Banks are "stepping up" to comply with the Obama administration's guidelines to keep people in their homes, Crouse said. Some banks are renting homes back to previous owners. "They know they're stabilizing the market by pulling back (on bank-owned inventory) and getting multiple cash offers for anything $125,000 to $200,000," he said. "Banks are going to lose anyway, but it's less they're going to lose." Tim Kelly Kiernan of ReMax Brodkin Group said the current foreclosure inventory is "being picked over pretty good" with lots of cash deals. Lenders are being more flexible in negotiations, he said. His research indicates that banks are indeed holding back hundreds of thousands of properties nationwide. There were nearly 500 notices of default filed in Las Vegas on June 8, he said. "That is just one day, so if we just do the math, more foreclosures are coming and fast," Kiernan said. "Unless the Obama administration does something to stop this, home values will continue to fall."

Pavlov's Dog and Jim Cramer's Call of the Bottom in Housing - (Charles Hugh Smith at www.oftwominds.com) Like Pavlov's dog, Jim Cramer announces "the bottom is in" every time he sees a housing chart. Sadly, this is a conditioned response, not reality. In Pavlov's famous experiment, a dog hearing a ringing bell began drooling as if food was present. In a bizarre parallel to the classic experiment, Jim Cramer announces "the bottom is in" every time he sees a housing chart. Pavlov began his experiment by showing his dog a bowl of food (powdered meat). The dog naturally salivated, what Pavlov termed an unconditioned response. Then Pavlov rang a bell when food was presented; the bell was a neutral stimulus. Finally, he rang the bell without any food present; the dog began salivating. This salivation is called a conditioned response, and the process is called classical conditioning. Sadly, we can observe this behavior now in Jim Cramer, who nonsensically called a bottom as housing starts leaped. Here's Jim's call, dated 6/16/09: Cramer: Housing Has Officially Bottomed: According to the Commerce Department, there were 47,000 more housing starts in May than the 485,000 expected, a number 17% higher than the month before. The two regions seemingly in the biggest hole, the South and West, jumped about 17% and 29%, respectively. Building permits, which can predict the market’s future to a certain extent, showed significant growth as well. Now Cramer – and probably the homebuilders, too – sense an end the morass that weighed so heavily on the markets. What does a bottom look like? It’s the combination of ramping sales, and sales in certain areas are up ten times those of last year, and an end to falling prices. That’s exactly what we’ve seen for the past three months, Cramer said. Uh, Jim, we hate to tell you, but building more housing when there's a huge inventory of unsold houses and condos as interest rates are leaping up is not exactly bullish. (Psychotic disassociation from reality would be the official diagnosis.) We know this chart is just going to trigger more of your copious bottom-calling, but look at this and tell us what's so bullish: This recent "improvement" in sales is a tiny blip up within a massive collapse. To call a bottom based on such a modest increase is truly psychotic disassociation; statistically, both the increase in sales and housing starts are minor enough to qualify as statistical irrelevancies, a.k.a. "noise." Then there's the little matter of rising mortgage rates. Sales are announced when they're signed, not when they close, so oops, a whole passel of buyers might get bumped or simply bail when they calculate what the half-point rise in rates will do to their monthly nut. So in other words, the glowing sales numbers are highly likely to be revised downward once actual escrow closings are tabulated.

Connecticut AG Targets Servicing Practices at Fannie, Freddie - (www.housingwire.com) The Attorney General of Connecticut, Richard Blumenthal, is asking Fannie Mae and Freddie Mac to turn over documents regarding the foreclosure and default servicing practices of the GSEs in the state, according to letters he sent to the firms earlier this month. The letters are dated June 4 and give a deadline of compliance by June 19. Other than that, at this moment, none of the parties involved are commenting on the requests for information. Assistant Attorney General Jon Blake, who is working the case, could only acknowledge and validate the inquiry at this point, but would not say if the firms were expected to meet the deadline. In the letters, Blumenthal notes that his office is receiving complaints that “consumers are not receiving proper foreclosure notices and are being charged excessive fees in connection with foreclosure actions.” Blumenthal states these complaints may reveal a system of favoritism, where only a few select law firms and state troopers are assigned to deal with actions the GSEs are taking on the borrowers. A source for HousingWire however, states that this “concentration of resources” is a common practice in default and foreclosure servicing and not unique to GSEs. Fannie, Freddie, and the Federal Housing Finance Agency (which regulates the GSEs, and is currently their conservator) are not commenting on the state AG’s inquiry at this time.

Think $134 Billion Bond Smuggling Is Big? Try $2.5 Trillion - (www.deathby1000papercuts.com) It’s been over a week since two “Japanese” men were detained on an Italian train near the Swiss border after Italian customs police discovered 134 billion in US Federal Reserve bonds. So far, according to the international press the men have yet to be positively identified as to whether they’re from Japan (they were purportedly carrying Japanese passports) or if Italian prosecutors have ascertained as to whether the bonds are real or counterfeit. Here’s the link to the Times Online giving more of the scant details of the story….. As for the MSM, CNN’s blog IReport had a poster named “SuperMax” in Milan post the story about the Italian train mystery. No questions asked and no followup. Must be CNN’s way of “cutting costs” in the newsroom while Asia News had these points to ponder: 1. When it comes to Italy the world press has tended to focus on Italian Prime Minister Berlusconi’s personal problems rather than on stories like the bonds smuggling affair which has been front page on Italian newspapers. 2. The fear of counterfeit bonds and securities has spread across Asia with the result that real securities are also considered with suspicion. 3. During the Second World War several countries at war printed and put in circulation perfectly counterfeit enemy money. It is also historically established that some central banks, like the Bank of Italy 65 years ago, issued the same securities twice (identical registered number and code). This way they could print more money with legal tender than they officially declared. The main difference though is that 65 years ago the world was involved in a bloody war, which is not the case today.

GSEs Hold $345 Billion in Multifamily Mortgage Debt - (www.housingwire.com) The volume of commercial and multifamily mortgage debt outstanding remained largely unchanged throughout the first quarter of 2009 at $3.48trn. Multifamily mortgage debt outstanding grew 0.6% from Q408 to $908bn in Q109, according to data analyzed by the Mortgage Bankers Association. Government-sponsored enterprises and mortgage giants Freddie Mac (FRE: 0.72 +5.88%) and Fannie Mae (FNM: 0.65 +3.17%) hold the largest chunk of outstanding multifamily, with $191bn in federally-regulated mortgage pools and $154bn in their own portfolios. “Banks, thrifts, Fannie Mae and Freddie Mac all increased their holdings of commercial and multifamily mortgages during the first quarter, while run-off among CMBS and life company loans decreased those investors’ holdings,” said Jamie Woodwell, MBA’s vice president of Commercial Real Estate Research, in a media statement. “The relatively long-term nature of commercial real estate finance,” Woodwell adds, “has meant greater stability in the levels of commercial and multifamily mortgage debt outstanding than is seen among many other types of credit.” Commercial banks hold the largest chunk — $1.56trn or 45% — of commercial and multifamily mortgages, while issuers of commercial mortgage-backed securities (CMBS) and other asset-backed securities hold the second-largest chunk — $763bn or 21%, according to the MBA’s findings. Between Q408 and Q109, the number of loans at least 30 days delinquent held in CMBS rose 0.68 percentage points to 1.85%, according to the MBA’s Commerical/Multifamily Delinquency Report. The delinquencies must have continued in the months since, as one ratings agency noted an alarming rate as recently as May. Fitch Ratings this week warned on rising delinquencies among CMBS as the retail and multifamily loans collateralizing them continue to perform poorly and ultimately default. CMBS experienced a 2.07% delinquency rate in May, the highest ever recorded by the ratings agency since beginning its loan delinquency index in 2001.

Monday, June 29, 2009

Suitcase With $134 Billion Puts Dollar on Edge: William Pesek - (www.bloomberg.com) It’s a plot better suited for a John Le Carre novel. Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear. Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit? The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale. The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar. The dollar is, for better or worse, the core of our world economy and it’s best to keep it stable. News that’s more fitting for international spy novels than the financial pages won’t help that effort. It is incumbent upon the U.S. Treasury to get to the bottom of this tale and keep markets informed. GDP Carriers: Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who? These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest U.S. creditors. It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border. This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travelers have more U.S. debt than Brazil in a suitcase and, well, that’s life. Clancy Bestseller: You can almost picture Tom Clancy sitting in his study thinking: “Damn! Why didn’t I think of this yarn and novelize it years ago?” He could have sprinkled in a Chinese angle, a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller. Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the “Miami Vice” star was stopped by German customs officers as he was traveling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research. When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didn’t read April 1. Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. Yosano would have some explaining to do about Japan’s $686 billion of U.S. debt if more of these suitcase capers come to light.

Loan Redos Get Tangled in Thicket of Red Tape - (online.wsj.com) Kellina Lawrie used to be a mortgage broker, pitching loans to borrowers who in the end couldn't afford them. Her current job is working through the wreckage. Ms. Lawrie is one of thousands of J.P. Morgan Chase & Co. employees trying to modify mortgages for Americans who are in danger of losing their homes. "I feel badly for them, but I also have a responsibility to the bank," says the 30-year-old Ms. Lawrie, who was forced to sell her own home and trade in her Mercedes for a Toyota when the housing market went bust. Clobbered by the recession, millions of homeowners are asking for help from mortgage lenders like J.P. Morgan's Chase unit, the nation's third-largest servicer of mortgages behind Bank of America Corp. andWells Fargo & Co. Large and small banks have responded with programs that reduce interest rates, stretch out payments and provide other assistance. These efforts are getting a boost from the Obama administration's housing-rescue plan, which gives lenders financial incentives to modify as many as nine million mortgages. But the competing interests, red tape and raw emotions that collide in Ms. Lawrie's cubicle and in the loan-counseling center where she works show how hard it will be to overhaul those troubled loans. More than 9% of 45 million U.S. mortgages, or about four million loans, were delinquent in the first quarter of 2009, according to the Mortgage Bankers Association. That is the highest level since the group started tracking such data in 1972. As of the end of April, though, just 518,155 home loans had been modified, says Hope Now, a coalition of mortgage companies, investors and housing counselors. Getting a mortgage modified can take months, slowed by thin staffing and mountains of paperwork. With so many loans bundled and sold to investors, it's sometimes hard to figure out who even owns them. The new federal program requires borrowers to meet slightly different requirements than bank programs do, meaning banks need to navigate two procedures….. Bill Campbell, a self-employed electrician in Covington, Ky., recently got a new 20-year mortgage from Chase with an interest rate of 2.75% that will rise no higher than 4.75%, compared with his previous rate of 5.375%. Mr. Campbell, 60, fell three months behind last year on the loan for his 114-year-old house when his business began to slow. "This is absolutely wonderful for me, and I can tell that I will start having more money coming in because I'm starting to get more work," he says. Joe Figueroa, a 42-year-old county worker in Cleveland, hasn't been so lucky. He says he fell behind on his $133,000 mortgage after an illness that forced him to take unpaid medical leave several years ago. Once he went back to work, he tacked additional money onto his monthly $1,300 payments for a while, but remains behind. Mr. Figueroa says he can't persuade Chase to halt foreclosure proceedings on his 150-year-old Victorian house, though he filed modification paperwork five months ago. "I didn't borrow more than I could afford and I'm not asking to keep the house for free," says Mr. Figueroa.

Indictment: Man posed as dead mom for 6 years - (www.cnn.com) A 49-year-old man impersonated his dead 77-year-old mother in paperwork -- and sometimes in person -- for six years, collecting more than $100,000 in her name, according to the Brooklyn district attorney. The man sometimes dressed as his mother and, with an accomplice, collected more than $52,000 in Social Security benefits and another $65,000 in city rent subsidies, prosecutors said. Thomas Parkin and a man accused of being his accomplice, Mhilton Rimolo, 47, pleaded not guilty Wednesday to a sweeping 47-count grand jury indictment that includes charges of perjury, grand larceny, conspiracy, forgery and criminal impersonation, Brooklyn District Attorney Charles J. Hynes told reporters. Their bail was set at $1 million each. If convicted, they could each face up to 25 years in prison. "These defendants ran a multiyear campaign of fraud that was unparalleled in its scope and brazenness," Hynes said. Authorities allege Parkin impersonated his late mother, Irene Prusik, after her death in September 2003. On April 29, surveillance video captured Parkin posing as his mother to renew her driver's license at a state Department of Motor Vehicles office in Brooklyn, authorities said. Parkin was wearing a blonde wig, a red sweater, sunglasses and a scarf around the neck, authorities said. Next to him was Rimolo, who was pretending to be her nephew, authorities said. "[Parkin] did a pretty good job of covering himself up so that those that didn't know what to look for wouldn't be able to see anything," said Michael Vecchione, chief of the Brooklyn district attorney's rackets division. According to the indictment against him, the source of the fraud dates as far back as 1996, when Prusik ceded the deed of a building she owned in the Park Slope section of Brooklyn to her son. By 2000, he had gotten into debt after purchasing properties with business partner Rimolo, "presumably for speculation," Hynes said.

"Excessively cheap money in the U.S. was a driver of today's crisis… "I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis.":, Angela Merkel, German Chancellor, November 27, 2008

"Greenspan needs to create a housing bubble" from 2002! - (www.nytimes.com) If the story of the current U.S. economy were made into a movie, it would look something like ''55 Days at Peking.'' A ragtag group of ordinary people -- America's consumers -- is besieged by a rampaging horde, the forces of recession. To everyone's surprise, they have held their ground. But they can't hold out forever. Will the rescue force -- resurgent business investment -- get there in time? The screenplay for that kind of movie always ratchets up the tension. The besieged citadel fends off assault after assault, but again and again rescue is delayed. And so it has played out in practice. Consumers kept spending as the Internet bubble collapsed; they kept spending despite terrorist attacks. Taking advantage of low interest rates, they refinanced their houses and took the proceeds to the shopping malls. But predictions of an imminent recovery in business investment keep turning out to be premature. Most businesses are in no hurry to go on another spending spree. And those that might have started to invest again have been deterred by sliding stock prices, widening bond spreads and revelations about corporate scandal. Will the rescuers arrive in the nick of time? Not necessarily. This movie may not be ''55 Days at Peking'' after all. It may be ''A Bridge Too Far.'' A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever. The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging. On the surface, the sharp drop in the economy's growth, from 5 percent in the first quarter to 1 percent in the second, is disheartening. Under the surface, it's quite a lot worse. Even in the first quarter, investment and consumer spending were sluggish; most of the growth came as businesses stopped running down their inventories. In the second quarter, inventories were the whole story: final demand actually fell. And lately straws in the wind that often give advance warning of changes in official statistics, like mall traffic, have been blowing the wrong way. Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured? Bear in mind that business forecasters are under enormous pressure to be cheerleaders: ''I must confess to being amazed at the venom my double dip call still elicits,'' Mr. Roach wrote yesterday at cbsmarketwatch.com. We should never forget that Wall Street basically represents the sell side. Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble. But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it's a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense.

Sunday, June 28, 2009

Europe Fears End of Incentives Will Dent Car Sales - (www.nytimes.com) Cash-for-clunkerprograms end up being like crack cocaine or like taxes. Once you implement on a temporary basis, industry will fight every attempt to end the program. As a cash-for-clunkers program is considered by Congress, European carmakers say they are worried about the impact of weaning themselves off similar incentives when they expire this year. The payments have proved to be a huge success among consumers across Europe since they were introduced in late 2008. In Germany, they have helped increase sales by about 40 percent from a year ago. But for car companies, living without them will not be easy, said Carlos Ghosn, the chief executive of Renault and Nissan and chairman of the European Automobile Manufacturers’ Association. “The incentives have given us some breathing room and obviously we are worried about what happens when they end,” Mr. Ghosn said in an interview in Brussels. “We are worried because we know it will have a negative impact. Hopefully, the economy will have improved enough by then so that the impact will not be too dramatic.” Halting the incentives is proving much more complicated than introducing them. Germany has already extended the deadline of its program once, and French automakers want them to continue beyond their scheduled elimination at the end of 2009. The demand for new cars, however, is not expected to improve by then, leaving automakers wondering how they can tempt consumers to buy cars. While Mr. Ghosn said that the American market could begin recovering by the end of 2009, he asserted that an upswing in Europe would take much longer. “I don’t see any improvement before 2011,” he said. “It would take a miracle for the car industry to see growth in Europe before 2011.”

Obama's Blueprint for Reform Concentrates Still More Power in Hands of the Fed - (Mish at globaleconomicanalysis.blogspot.com) The Washington Post has released a "near final" draft of Obama's financial reform proposals. As expected, the paper whitewashes the role of the Fed and Fractional Reserve Lending as well as the role of unfunded Congressional spending in creating the mess. Instead, Obama's plan gives more power to those responsible for creating the mess. Please consider Obama Blueprint Deepens Federal Role in Markets. The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building. The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post. The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms. It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy. Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans. The government would create a new agency to protect consumers of mortgages, credit cards and other financial products. And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues. "Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right. My Comment: Speed is always important when you are attempting to to set yourself up as prosecutor, judge, and jury. Should anyone actually have the time to dig into the details, the odds are they would find many reasons to not go along.

State tries to reassure bondholders after S&P sounds alarm - (www.latimes.com) California Treasurer Bill Lockyer has insisted all through Sacramento's latest budget crisis that he would never allow the state to renege on what it owes bondholders. Yet when credit-rating firm Standard & Poor’s on Tuesday warned that it might cut California’s credit grade -- which already is the lowest of the 50 states -- S&P flagged at least the possibility of default. In the first paragraph of its statement, S&P says that "although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view." S&P’s language incensed Lockyer’s spokesman, Tom Dresslar. "S&P raises undue alarm about the potential for missed bond payments," he said. "There is zero chance of that happening." Worries about the state’s fiscal fate, combined with an early-June jump in U.S. Treasury bond yields, have driven market prices of the state’s bonds sharply lower since mid-May, sending yields soaring. Tax-free yields on 10-year California general obligation bonds were between 5% and 5.1% on Tuesday, according to several traders. The yield was under 4.4% in mid-May. Despite the market’s jitters, Lockyer has noted many times that payment of interest and principal on the state’s $59 billion in general obligation bond debt is mandated by the state Constitution. Only "thermonuclear war" could interrupt debt repayment, the treasurer has said. In the Constitution, bondholders come second, after education funding. S&P, in its statement Tuesday, estimated that constitutionally required spending on education would be $36 billion in fiscal 2010 (beginning July 1). Principal and interest payments of $5.7 billion in fiscal 2010 then would have to be funded before the state could divert money to other expenses. S&P estimated that, after funding education, the state would have $53 billion in resources to cover the year's debt service. Isn’t that a big-enough chunk of change to make bondholders feel secure? S&P said that although the revenue coverage of the debt service for the year appeared to be significant, the firm was concerned about cash flow -- whether week to week or month to month the state would have the cash needed to make debt payments. "Even if revenue for the year is sufficient to meet high-priority payments for education and debt service, we believe the timing of cash inflows and outflows could cause acute liquidity shortages with the potential to present relatively serious credit concerns," the firm said. Dresslar said that was nonsense, because the state knows when debt payments are coming due and will husband cash accordingly for creditors. "We are not going to miss any payments," he said.

Foreclosure freeze prods banks to modify loans - (www.sfgate.com) California implemented a new foreclosure moratorium on Monday to goad banks into modifying mortgages for struggling homeowners. The California Foreclosure Prevention Act, signed by Gov. Schwarzenegger in February, adds 90 days onto the time period between when homeowners default on a loan and when their home can be repossessed in foreclosure. Banks can avoid the 90-day holdup by having a comprehensive program in place to make mortgages more affordable by reducing the interest rate, extending the loan term, or reducing or deferring some of the principal. Such programs must be approved by regulators. "The goal is to compel banks to do systematic loan modifications across California to reduce our foreclosure rate, which is the highest in the nation," said Assemblyman Ted Lieu, D-Torrance, who wrote the bill. "Until we slow that down, the California economy cannot recover." Experts said the California initiative should complement the Obama administration's foreclosure prevention plan, which offers financial incentives to servicers who complete loan modifications. "This law is most useful as a stick to supplement the Obama administration's carrots to get loan servicers to adopt a much more systematic framework for doing loan modifications," said Paul Leonard, director of the California office in Oakland for the Center for Responsible Lending. "It is a useful nudge to get more servicers to sign contracts to adopt the Obama modification plan." In the past few months, 15 servicers have agreed to implement the Obama plan, according to the Web site MakingHomeAffordable.gov. Government spokesmen have said that about 100,000 homeowners nationwide have been sent offers for trial modifications, a relatively modest number compared with the administration's goal of helping 3 million to 4 million homeowners avoid foreclosure.

‘Buy China’ policy set to raise tensions - (www.ft.com) China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus programme in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world. In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms. The government also said it was launching an investigation in response to complaints from domestic industry associations which accuse local governments of favouring foreign suppliers in procurement related to the country’s Rmb4,000bn ($585bn, €421bn, £356bn) economic stimulus package. “From a domestic political perspective this makes some sense because local governments do tend to favour foreign products in some categories,” Dong Tao, chief China economist for Credit Suisse, said. “But given how important free trade is for China’s economy this is not the right message for them to be sending to the rest of the world right now.” Just a few months ago Beijing was raging against a proposed “Buy American”clause included in the US economic rescue package. “Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages,” Yao Jian, a Chinese commerce ministry spokesman, told reporters in February. “We express deep concern about these [measures] ... under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages.”

For Boomers, recession is redefining retirement - (www.usatoday.com) The “laziest” generation follows the “greatest” generation. They grew up during a time of cultural change, and now are being forced to redefine retirement at midlife. The 77 million Americans in the Baby Boom generation face an economic storm: The Wall Street meltdown trampled their retirement nest eggs more than any other group. After losing jobs during what they thought would be some of their peak earning years, many are struggling to get back into the workforce. Health care costs are rising, and declining home values mean they might not be able to count on home equity to guarantee an easier retirement. "This generation will be sobered by their experience," says John Coyne, president of Brinker Capital, an investment management firm. "They may not have as extravagant a vision of retirement as they did last July." The confluence of events has an even bigger impact on a subset of the Baby Boomers known to analysts as the Sandwich Generation. Those Boomers are putting money toward their children's college education and their aging parents' long-term care, as well as their own retirement savings. The reality is sinking in: Baby Boomers, born from 1946 to 1964, are planning to work longer, save more money and spend less, to reach any semblance of the retirement they once envisioned. According to AARP: •35% of those ages 45 to 54 have stopped putting money into their 401(k), IRA or other retirement accounts. •25% said they have prematurely withdrawn funds from their retirement accounts. •56% have postponed a major purchase. •24% have postponed plans to retire. "Today, I see myself working until I drop," says Kyril Wickenberg, 59, of Savannah, Ga.

California's credit rating may get cut further - (www.latimes.com) California's credit rating, already the lowest of the 50 states, may be cut again, Standard & Poor's warned Tuesday. As the debate over budget cuts drags on in Sacramento, S&P put its "A" grade on the state's $59 billion in general obligation bonds on "negative credit watch," meaning the rating is at risk of a downgrade. Using language that could further spook bond investors, S&P said, "Although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments." The Legislature and Gov. Arnold Schwarzenegger are facing a $24.3-billion budget shortfall, and Controller John Chiang has warned that the state could run short of cash beginning July 28, just one month into fiscal 2010. The Obama administration repeated Tuesday that it wouldn't offer special financial assistance to California. "We'll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they're going to have to solve," White House Press Secretary Robert Gibbs said in Washington. Worries about the state's fiscal fate, combined with an early-June jump in U.S. Treasury bond yields, have pushed market interest rates on the state's outstanding bonds sharply higher since mid-May. Yields on bonds rise as their prices fall. Tax-free yields on 10-year California general obligation bonds were 5% to 5.1% on Tuesday, according to several traders. The yield was under 4.4% in mid-May. A further credit downgrade could spur investors to force the state to pay even higher interest rates when it borrows. Still, California Treasurer Bill Lockyer has insisted all through Sacramento's deepening budget woes that he would never allow the state to renege on what it owes bondholders. S&P's language Tuesday incensed Lockyer's spokesman, Tom Dresslar. "S&P raises undue alarm about the potential for missed bond payments," he said. "There is zero chance of that happening." Payment of interest and principal on the state's general obligation debt is mandated by the state Constitution. S&P, in its statement Tuesday, estimated that constitutionally required spending on education would be $36 billion in fiscal 2010. Under the law, bond principal and interest payments of $5.7 billion for the year then would have to be funded before the state could pay other expenses.

British Airways Asks Staff To Work For Free - (Mish at globaleconomicanalysis.blogspot.com) Inflation is roaring back. Employment is soaring. Businesses are expanding, wage pressures are mounting, and pricing power is so great that British Airways asks staff to work for free. British Airways is asking thousands of its staff to work for free for up to four weeks, spokeswoman Kirsten Millard said Tuesday. In an e-mail to all its staff, the airline offered workers between one and four weeks of unpaid leave -- but with the option to work during this period. British Airways employs just more than 40,000 people in the United Kingdom. Last month, the company posted a record annual loss of £400 million ($656 million). Its chief executive declared at the time there were "absolutely no signs of recovery" in the industry. "I'm 30 years in this business and I've never seen anything like this. This is by far the biggest crisis the industry has ever faced," said Willie Walsh, British Airways' chief executive. A spokesman for one of Britain's biggest unions said its workers could not afford to work for free for a month. In these trying times it's best to be appreciative you have a job, even if you're not paid for it 4 weeks out of the year.

Saturday, June 27, 2009

New Hampshire Revenue chief airs tax ideas - Mortgage refinance, LLC loopholes are hot topics - (www.concordmonitor.com) With days to go before lawmakers are supposed to finish the state budget, New Hampshire Revenue Commissioner Kevin Clougherty yesterday presented lawmakers with a smorgasbord of tax ideas that could help close a $150 million budget gap. The biggest-ticket items: taxing mortgage refinancing and closing loopholes on limited liability corporations. For weeks, lawmakers working to finalize the state's next budget have extolled the idea of a "third way," new ideas for fees, fines and taxes that don't involve two lightning-rod plans: the Senate plan to permit - and tax at a 49 percent rate - 13,000 video slot machines in the state and the House plan to implement a new 5 percent tax on capital gains. The House-Senate panel negotiating the 2010 and 2011 state budget is supposed to finish Thursday. Clougherty's refinance tax presentation, however, quickly attracted lightning bolts, with senators asking whether the tax would hurt those who are already struggling, whether it would increase the cost of home ownership and whether the revenue in the proposal could be relied upon. Gov. John Lynch's office has quietly vetted the refinance idea for a couple of weeks; the state Mortgage Bankers and Brokers Association came out against it Thursday. "This has been floated for a couple of weeks now in the media, and I don't think I've talked to anyone anywhere" who likes the idea, said Berlin Republican Sen. John Gallus, who said he sees many people refinancing properties to keep their homes, send a child to college or pay for emergency home repairs. Manchester Democrat Lou D'Allesandro panned the refinance tax idea after the hearing. "That's the one I don't see. . . . I don't see it as an alternative when we have other alternatives that are better," said D'Allesandro, pointing to the plan he sponsored to allow a total of 13,000 video slot machines spread between the state's three horse and dog tracks and two North Country slot parlors. D'Allesandro estimates the plan would bring in $205 million for the state's two-year budget, which will total about $11.5 billion.

Report: Durbin Cashed Out During Big Stock Collapse‎ - (www.newsroomamerica.com) Senior U.S. Sen. Dick Durbin, a Democrat from Illinois, cashed out most of his stock during the huge market collapse last fall, after meeting with then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, Bloomberg News reported. Durbin, the Senate's No. 2 Democrat, sold about $115,000 worth of stocks and mutual fund shares and invested much of the money in Warren Buffett's Berkshire Hathaway Inc., the financial newswire service said. Durbin's stock sale came a day after meeting with Paulson and Bernanke, who had "urged congressional leaders in a closed meeting to craft legislation to help financially troubled banks," Bloomberg reported. The same day, according to Durbin's 2008 financial disclosure form, he bought more than $42,000 worth of Berkshire Hathaway's Class B stock. Durbin's sale took place as U.S. stock markets plummeted last September. "The Standard & Poor's 500 index plunged 4.7 percent last Sept. 15 after the bankruptcy of Lehman Brothers Holdings Inc. and Bank of America Corp.'s government-engineered takeover of Merrill Lynch & Co. By the end of October, the index had fallen 22.6 percent," Bloomberg said. Durbin spokesman Joe Shoemaker said his boss "was doing what a lot of other people were doing, taking a look at their savings" and seeing it "start to tank and trying to preserve some level of wealth by getting out of the market." Critics counter, however, that most Americans didn't have access to Treasury and Fed chiefs to help them make their decision to sell before markets completely plunged.

Senate’s No. 2 Democrat, Dick Durbin, Dumped His Stock After Closed Meeting with Treasury Secretary in September - (doctorbulldog.wordpress.com) Alright, here’s the scenario: You have lots of money invested in stocks and mutual funds. You are privy to a closed meeting with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. In that meeting, you learn that the bottom has dropped out on the Fannie and Freddie scam. Not only that, but the Treasury is going to declare a financial emergency and steal about 700 billion in tax-payer dollars to try and salvage the financial train-wreck. The news is sure to cause the Stock Market to fall hundreds, if not thousands of points. What do you do? Well, you could wait until news of this becomes public, or, you could use this key bit of insider information and sell off all of your stocks and mutual funds the moment the Stock Market opens up in the morning—hours ahead of when the grim financial news is officially released to the public by the government—and, then re-invest that money in a less risky company; like Warren Buffett’s Berkshire Hathaway Inc., for instance. Which is, of course, exactly what Senator Dick Durbin seems to have done: Durbin cashed out during big stock collapse. Asset sales came after meeting with Fed, Treasury chiefs. As U.S. stock markets plummeted last September, the Senate’s No. 2 Democrat, Dick Durbin, sold more than $115,000 worth of stocks and mutual-fund shares and used much of the money to invest in Warren Buffett’s Berkshire Hathaway Inc.

Proposed Legislation in Oregon Seeks to Stem Foreclosures - (www.oregonlive.com) Another state-backed hair-brained scheme to delay foreclosures with unintended consequences of locking homeowners into long-term unsustainable debt. When Kelly Holmes stepped into the kitchen of a house for sale in Eugene three years ago, she knew she had found her dream home. With plenty of storage space and an island in the middle, the kitchen suited Holmes' family of six and was perfect for her hobby of cooking and baking. The new subdivision was close to the house the family had been renting, enabling her children to stay at the same school. But two years and two layoffs later, Kelly and Ivan Holmes lost their home to foreclosure. They didn't make mortgage payments and risked being sued for thousands of dollars."It was one of, if not the worst, time of my life," Kelly Holmes said. The Holmes family is one of many who have lost their homes in Oregon's turbulent economy, and two bills alive in Salem are aimed at helping those facing foreclosure. "Who's to say they don't track you down a year later and still sue you for the $50,000?" Ivan Holmes asked. House Bill 3004 would prevent lenders from suing borrowers long after the foreclosure sale, which currently is allowed under Oregon's Trust Deed Act. Senate Bill 628 would attempt to prevent foreclosures by offering free home counseling and by obligating the lender and borrower to discuss an alternative payment plan before foreclosing on the home. When real estate was booming, mortgage loans were virtually unregulated and accessible to people with poor credit histories. Borrowers such as the Holmes family, who had a shaky credit background and a past bankruptcy, were told they could secure a loan with no money down -- and were even offered $1,000 for signing the trust deed. A combined loan consisting of two mortgage notes called an 80/20 loan became common, which is how the Holmeses financed their house. Under that arrangement, the two notes make it appear as if borrowers were able to afford a 20 percent down payment so they can qualify to finance the remaining 80 percent. Because such borrowers often had a low income or shaky finances, they could easily fall into debt and risk foreclosure. Stacey Howard, a foreclosure counselor at the nonprofit Neighborhood Economic Development Corporation, said about 70 percent of borrowers who come to her facing foreclosure have combination loans. "People can get into them with almost no down payment, and when they did that, they didn't have to pay mortgage insurance," she said. Howard said while the combination loan may work for a savvy borrower, "for the average person, they're not a good option." The credit crunch and tighter lending rules have made two-note loans rare. Foreclosures, though, have only increased as more people lose their jobs. A report from the Mortgage Bankers Association at the end of May showed that 2.2 percent of Oregon's 636,000 outstanding mortgages were in the process of foreclosure in the first three months of 2009, the highest rate since 1985.

Latvian Lawmakers Will Vote Today on Budget Cuts to Unlock Loan - (www.bloomberg.com) Latvia’s lawmakers will approve cuts in government spending as early as today, enabling bailout payments to resume and allaying concern about a currency devaluation. The Riga-based parliament is poised to vote on cuts of $1 billion, equal to 10 percent of budget spending, in an effort to unlock a 1.7 billion-euro ($2.4 billion) tranche from a group led by the European Commission and the International Monetary Fund. The funds will probably be transferred at the end of June or in early July, Prime Minister Valdis Dombrovskis has said. Latvia, the European Union’s fastest growing economy in 2006, is suffering the bloc’s severest recession and relying on a 7.5 billion-euro international bailout to avoid bankruptcy. The loan’s terms assume Latvia will keep its euro peg and curtail the budget deficit, exacerbating the slump. “The government gets to buy some time” with the loan, said Martins Kazaks, chief economist at Swedbank AB’s Latvian unit. “It seems they will do what is necessary.” Lawmakers will vote on measures including 10 percent pension reductions and 20 percent state pay cuts, with the proposal also entailing the closure of some state agencies and advisory councils for state-owned companies. “We are preparing for a late night,” said Lelde Rafelde, a spokeswoman for the parliament, in a telephone interview. Parliament will begin an extraordinary session, in which 16 bills will be discussed starting at about 3 p.m. local time. After that, lawmakers will return to a standard session to look at legislation including the budget amendments, she said.

Calif. Aid Request Spurned By U.S. - (www.washingtonpost.com)The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California. Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states. With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge. "This matters for the U.S., not just for California," said U.S. Rep. Zoe Lofgren, who chairs the state's Democratic congressional delegation. "I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not." The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy. After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout. These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions. California is among several states that have asked for a bailout from the Treasury Department. A few have gotten some traction, notably Michigan, whose economy is among the country's weakest and is struggling to deal with the fallout from the bankruptcies of General Motors and Chrysler. To stave off mass layoffs, Treasury officials are considering helping the state's auto suppliers stay afloat and convert their businesses to support other industries. California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."

Record Corporate Bond Sales Fail to Ease Cash Gap, Moody’s Says - (www.bloomberg.com) s many as 14 percent of investment grade European companies will be unable to meet their cash requirements in the next 12 months even as bond issuance is at record levels, according to Moody’s Investors Service. For high-risk, high-yield companies the situation is worse, with as many as 20 percent failing to have sufficient cash to meet outflows, the New York-based ratings firm said in a report today. “Despite significant bond issuance volumes since the beginning of the year, liquidity remains fragile for corporate issuers,” said Jean-Michel Carayon, a corporate finance analyst at Moody’s in Paris. European companies have sold more than 640 billion euros ($886 billion) of bonds this year to meet refinancing needs as the credit crisis forces banks to crimp lending. Borrowers have about $650 billion of debt maturing in the next 12 months and Moody’s said that “as the global financial crisis continues, the availability of reliable external funding continues to be a question mark.” Almost half of sub-investment grade borrowers are in danger of breaching terms of their debt agreements, the report said, with 17 percent of investment grade companies at peril. “Economic prospects are expected to remain weak at least for the remainder of 2009,” said Moody’s analyst Sabine Renner. “While a continuation of recent bond market activity helps mitigate -- at least to some extent -- liquidity pressures stemming from bank market stress and cash flow shortfalls, uncertainty will remain elevated.” High-yield debt is graded below Baa3 by Moody’s and BBB- at Standard & Poor’s.